>INDIA EQUITY STRATEGY (DEUTSCHE BANK)

Return of the "Feel good factor"

Electoral verdict: a big positive surprise; Raising Sensex target to 14,500
The surprise electoral verdict where the incumbent UPA was returned to power with a far more decisive mandate (relative to 2004) has come as a huge surprise – surpassing the most optimistic forecast. The political platform thus delivered to the Congress party now raises huge expectations on the roadmap and velocity of economic reform – disinvestment, increasing foreign direct investments, pension and insurance sector reforms etc – which had come to a virtual standstill under the UPA’s previous administration. We believe the verdict is one of those rare instances which justify a re-rating of the Indian equity market. Consequently we are raising our Sensex target to 14,500.

Buy beta with added focus on large cap domestic cyclicals
We see the return of a ‘feel good factor’ in India after a long gap. The return of the feel good factor coupled with our earlier assessment of an economic rebound in 2HFY2010 leads us to recommend investors to seek an aggressive portfolio with growth focused, high beta, domestic plays. Our top picks – DLF, Unitech, Larsen and Toubro, BHEL, HDFC Bank and Mahindra and Mahindra. Investors may also want to look at companies in search of balance sheet restructuring (Tata Steel,
Hindalco), which should be able to raise funds relatively more easily and sharply reduce balance sheet related risks.

Move away from the classical defensives.
We recommend investors to lighten up on the classical defensives and go underweight pharmaceuticals, telecom and consumer staples: Underweight Bharti, Sun Pharma, Dr Reddy’s and Hindustan Lever.

Runaway expectations from union budget, increasing equity issuance are key risks for market
The union budget (expected in July), is likely to be the next key milestone for the markets. We confess that this is going to be one of those budgets where expectations will run very high as the market will look to the government to deliver on the lost years of its earlier administration. Political realities (state election calendar, etc) may not allow government to be too nimble on reforms in its first budget, despite positive intent. We also remain cautious on a spate of new issues supply (private placements, equity raising) which could soak up liquidity from the secondary markets.

To see full report: INDIA EQUITY STRATEGY